Following the first introduction to the pre-revenue startup valuation, in this article we review the other well-known model for pre-revenue startups: the ‘Berkus Method’, named after its inventor, Dave Berkus, a well-known Californian angel investor.
Pre-Seed companies sometimes do not even have a minimal viable product yet, their business case is an idea and likely to be changed quite frequently during the first 18 to 24 months until a first product market fit is tested. Numbers and financial plans are worth nothing at this stage. Yet, there are valuation models Business Angels use to evaluate such early-stage startups. The most prominent method one is the “Scorecard” method. Developed by Bill Payne, this top-down approach compares a startup to other typical startups at the same stage (investors benchmark the “standard” value of a pre-seed or early seed company in this case), within a geographic region and startup-sector (regtech, digital health, fintech, SaaS, etc.).
The Venture Capital Method is often used for valuing early-stage companies. We show you how it is done.
It’s no secret: Switzerland is a financial powerhouse with its global insurance and banking industry. However, it is not so commonly known that the small country in the Alps is also pretty big when it comes to venture capital. According to the Swiss venture capital report, Swiss startups received about CHF 1.24 billion in investments in 2018, which is an increase of 31.8% in comparison to the previous year.
Startup Valuation is always a challenge but we created a free tool for that!
Alone the Swiss fundraising expert VentureLab organized in total 375 events last year and supported more than 1,000 Swiss startups while raising 735 million francs in investments. Not surprisingly, the most successful startups are located within the information and communications technology sector. We @Venionaire can literally see and feel the investment boom in the 26 cantons. In comparison, the report mentions the raised capital by startups in the UK and Germany with USD 2.6 billion and USD 2.3 billion respectively – the top VC countries in Europe by volume.
However, Switzerland is by far leading, if you compare the startup investment spending in early-stage companies per capita: Theoretically, every Swiss invests USD 147.6 in startups, while every Brit invests USD 39,4 and every German only USD 27.7. It is quite impressive how big the small country is in business!
Great VC efforts
Why is the country so successful? If you have a closer look at Switzerland you will discover a lot of efforts by the Swiss government as well as private organisations trying to foster Switzerland as an attractive startup hub. Great education possibilities (5 of top 100 universities worldwide are located in Switzerland), a high-tech environment not only in the prosperous fintech sector and government initiatives such as funding startups with half a billion CHF in 2018 or the Swiss entrepreneurs foundation pushing the agenda forward. Switzerland also established itself successfully as “Cryptovalley”: cryptovalley.swiss is one of the worlds leading Blockchain and Cryptographic Technology Ecosystems with over 754 startups, service providers and other organizations in the blockchain sector. Projects like Digital Switzerland helped to accelerate the startup economy, while the Kickstart Accelerator bridges the gap between startups, corporates, cities, foundations and universities to accelerate deep tech innovation.
Last but not least, the Swiss Private Equity & Corporate Finance Association is also very open-minded, having an own chapter solely concentrating on the fields of innovation processes, venture capital and startup companies in Switzerland and their role for the Swiss economy.
The top-5 funded Swiss startups 2018
(via Swiss venture capital report):
- SEBA Crypto (ICT, fintech) – 100 Mio CHF
Investors: BlackRiver Asset Management, Summer Capital, private investors
- Nexthink (ICT) – 84.2 Mio CHF
Investors: Index Ventures, Highland Europe, Forestay Capital, VI Partners, Auriga Partners, Galéo Capital, TOP Funds, private investors
- WayRay (ICT) – 77 Mio CHF
Investors: Porsche, Hyundai Motors, Alibaba Group, China Merchants Capital, JVCKENWOOD, JBIC, consortium of sovereign wealth funds
- Therachon (biotech) – 59.4 Mio CHF
Investors: Novo Holdings, Cowen Healthcare Investments, Pfizer Ventures, Tekla Capital Management, Versant Ventures, OrbiMed, Bpifrance, Inserm Transfert Initiative
- Chronext (ICT) – 33.2 Mio CHF
Investors: Endeit Capital, Tengelmann Ventures, Octopus Ventures, Partech Ventures, Capnamic
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In the second part of the series, we take a closer look at the difference between Venture Debt and Venture Capital. Click here for the first part of the series about “What is Venture Debt?”
Venture Debt vs Venture Capital
When comparing venture debt with venture capital, it is essential to bear in mind that venture debt is mostly a topic for mature (ventures) companies, which make a continual profit, whereas venture capital (equity) is for still early-stage companies. (Fuse3, 2017)
Startup Valuation is always a challenge but we created a free tool for that!
Venture capitalists and entrepreneurs are intimately connected; meaning they succeed or fail together. The venture capitalists often take a seat on the company’s board of directors in order to make the potential return match the risk. On the other hand, a venture debt lender does not take on the same risks as the VC; they are hedged. A lender’s returns are linked to fees, interests and warrants (equity kicker). VCs provide a higher portion of the whole capital mix between equity and debt. VCs are an appropriate choice to attain a venture of the ground when a huge amount of capital is required. The most important drawback of the venture capital is that it can be dilutive leading to losing significantly of ownership of the founders. However, Venture debt has very limited dilution for the company’s founders, which is why owners choose venture debt after raising equity capital from VCs. (Edgington, 2017)
As an early stage startup, your most prominent concern is probably access to capital and securing the first 18 months. You do not want to see the fruits of your early work dying before they hit the market. You demand supplemental forms of financing that provide your company with the required capital at a reasonable cost.
Venture debt is an essential part of any entrepreneur’s toolkit to respond to this demand – but is it suitable for early-stage? We gathered in this 4 part series critical and general information on venture debt. We would like to give you an overview of this rising alternative to traditional Venture Capital by answering the most frequently asked questions we received during the last months.
So what is Venture Debt?
Venture debt is a form of debt financing for venture equity-backed companies that lack the assets or cash flow for traditional debt financing, or that want greater flexibility. Patrick Gordon, Kaufmann Fellows.
Venture Debt is provided by banks, finance companies and funds and is generally structured as a three to a four-year term loan with warrants for company stock – enabling an equity kicker and serving as collateral to protect the downside.
Startup Valuation is always a challenge but we created a free tool for that!
The expected returns on venture debt capitals usually range from 12–25% in monthly repayments in association with loan interest and equity returns. (IPFS, 2016) Lending to early-stage companies is riskier than the interest rates. Therefore, lenders also take warrants while lowering the rates. (Denning, 2017)
Venture debt is an attractive option to finance business because it amounts to less equity dilution and it does not require valuation and is, therefore, a fast alternative. (Trinity Capital Investment, 2018) Furthermore, venture lenders need no board seats, and in comparison with equity, the due diligence procedure is less time consuming – because they are collateralised in the first rank with equity.
There are generally three types of venture debts:
- Growth capital is structured as a term loan and can be used to replace an equity round or provide additional working capital
- Accounts receivable financing allows revenue generating startup companies to borrow against their accounts receivable items
- Equipment financing is structured as a lease and is used for the purchase of equipment. (Alex Erhart, 2016)
In our next article, we will compare venture debt and venture capital and their differences.
Invest Europe published its annual report on investment and fundraising for the European private equity and venture capital industry. The report covers activity on over 1,250 firms, directly verified by fund managers using the European Data Cooperative (EDC). The EDC holds data from over 3,000 European private equity firms on 8,000 funds, 64,000 portfolio companies and 250,000 transactions since 2007. The research is recognised by coverage in the Financial Times.
The investment market is booming
Findings in the report paint a delightful picture of the Investment development in Europe. Fundraising reached €91.9 billion, surpassing 2016 by 12% and the highest level since 2006. Pension funds provided 29% of all capital raised, followed by funds of funds (20%), family offices & private individuals (15%), sovereign wealth funds (9%) and insurance companies (8%).
Private equity hits ten-year high
Simultaneously Private equity investment in European companies hit a ten-year high at €71.7 billion, a 29% year-on-year increase. Almost 7,000 companies received investment, of which 87% were small and medium-sized enterprises (SMEs). Divestments (measured at cost) increased by 7% to €42.7 billion. This is the third highest level of the past decade, with around 3,800 European companies exited in 2017. Venture capital investment increased by 34% to a ten-year high of €6.4bn, surpassing 2008’s amount by 13%. Nearly 3,800 companies were venture-backed, an 8% increase.
PE investments by industry
Companies focused on consumer goods and services in Europe received 15% more private equity investment compared to last year, representing 24% of the total. Almost equalling this were business-to-business products and services, increasing by 51% to account also for 24% of the total. The technology sector (ICT) reached a ten-year investment high, with 17% of the total, a year-on-year increase of 6%.
Geographical Distribution of the Investments
France and Benelux-based companies received 27% of private equity investments in 2017. Close behind was the UK & Ireland with 26%, followed by DACH-based companies (20%), Southern Europe (13%), the Nordics (9%) and CEE (5%).
The new generation of lawyers has high expectations about what technology can do for them. With life cycles of innovation getting constantly shorter, we are surrounded by new disruptive technologies and this is not different in the legal world. According to research from Thomson Reuters Legal, 579 “lawtech” patents were filed worldwide in 2016, up from just 99 in 2012. The expansion in Legal-Startups and patent filings are driven by interest for quicker and less expensive approaches to legal services.
In honor of the Legal Tech Conference taking place in Vienna today, we are highlighting 6 legaltech trends, which could make a big impact in the work of lawyers as well as the experience of their clients.
#1 – Robotic Lawyers
The most interesting case of a robotic lawyer is ROSS, an artificially intelligent legal research assistant built on IBM’s Watson supercomputer. Capable of handling ‘natural language’ legal questions, for which ROSS will return cited legal answers and topical readings from legislation to case law and secondary sources instantly, many legal heavyweights in the US are already using it, such as Latham & Watkins LLP.
#2 – Intelligent Legal Research and Document Analysis
Legal research is very costly for law firms. Therefore, advanced analytics programs, some of which use artificial intelligence and machine learning technology, are already proving to be invaluable for law firms, which handle and generate loads of documents. Most legaltech startups to date have focused on making this procedure and all this material more manageable.
#3 – Big Data Analytics
Big data has already caused a big impact in various industries, and it is not different for the legal world. Many tools are already helping improve the search process and give lawyers data-driven tools to research through millions of documents. Using big data can also lead to a greater degree of efficiency and transparency, which everyone will benefit from. Reducing the time it takes for lawyers to complete research and casework, will lead to improved access to the justice system.
#4 – Automated Legal Assistance
Many firms are already using packaged legal solutions instead of custom-tailored solutions for every client. For example, Wevorce users can have access for around USD 800 to a pre-packaged divorce plan that suits their needs together with pre-filled divorce forms. We can also find startups such as Bright Advise, where users only need to submit a question and a professional will be in touch with them shortly after.
#5 – Writing of Documents
Writing legal documents, together with legal research, are the tasks that most likely cause a strain on lawyer’s finances and time. Some startups are already automating those tasks using various programs or services. Many services like Ironclad may help create, fill, and manage contracts in an effective way.
#6 – New business models and payment methods for lawyers
The search for new business models or at least for the possibility of expanding their own business model will also play a greater role in the future for lawyers. An example would be to use data and smart algorithms to predict what a client might need and actively approach it.
All those trends, while impressive and likely to ease the workload and research of many lawyers, are still far from being an everyday reality. Legal advice is still a very personal job, clients often seek reassurance in face-to-face advice. The reality of an artificial intelligence lawyer might have to wait some decades but today the increasing presence of automated processes will start replacing associate-level lawyers and help firms save money and time managing documents and handling research.
If you are interested in getting to know more about this topic and how we can help your firm be more efficient, please contact our Partner and Head of Legal Alexander Rapatz.
For a long time, thinking about self-employment and entrepreneurship wasn’t a priority in Austria with high entry barriers (investments). Luckily, times have changed. Digitization has dramatically lowered these barriers. Today, anyone can come up with a good idea at the kitchen table and use it on their laptop, and soon after, business life begins. High investments in machinery and factories are no longer necessarily needed.
Beginning and end of the first VC funds
Only a few years ago, almost all initiatives within the Austrian startup ecosystem were run by the state. We experienced a market failure. The veterans of the venture capital scene Gert Reinhard Jonke (Venture Capital Funds), Michael Tojner (then venture investor behind BWIN), PONTIS Ventures and later Gamma Capital Partners had either already developed further, could no longer put together new funds, or have simply missed the advent of a new founder era. Startups in Austria were not completely at the beginning, but they needed new pioneers.
The beginning of the startup ecosystem 2.0
With Start Europe and later Pioneers Festival, the potential of the Austrian startup ecosystem and the need to catch up internationally became very clear. The most well-known early drivers of today’s startup ecosystem Speedinvest, i5Invest, Hansi Hansmann, Stefanie Pingitzer, Selma Prodanovic and our company (Venionaire was established in 2012) had initially a hard time to attract the attention from media, politics, and society. Even in 2015, it was too early to convince institutional investors on a larger scale, with many still licking their wounds from the dotcom bubble. Today, there are again efforts to address these investors, whether it will succeed to convince them this time is still uncertain.
Private initiatives are getting stronger
In addition, Austria hadn’t enough successful startup founders, who could support the ecosystem as mentors and investors after their exit. All of this has changed dramatically in recent years and the ecosystem has developed greatly – the number of investors has multiplied, established companies are regularly working actively with startups, and some government initiatives have done an excellent job creating a market that adapted the dynamics of the private sector. Above all, the commitment of institutional investors should be promoted so that Austria’s investment power will be further expanded. Especially in the field of high technology is still hidden potential that could be exploited through investments and technology transfer centers. The current strength of the scene can still be expanded!
In the next segment of this article, we present you an overview of the startup ecosystem in Austria from an investors perspective. This list was inspired by Bernhard Hauser’s blog and is build on his content. If an important player is missing, we are very happy if you shoot us a quick email.
Business Angel Networks (private sector)
Mergers of Business Angels are not a new invention. They offer Angels several benefits, such as sharing experience, co-investing, or better dealflow. Networks, which (also) operate in Austria in alphabetical order:
- eQventure Beteiligungsgesellschaft
- European Super Angels Club (ESAC)
- IECT – Hermann Hauser
- PRIME CROWD
- Startup300 (Linz)
- Tyrolian Business Angels (TBA)
Business Angel Network (public)
Venture Capital Fonds
- 3TS Capital Partners
- Apex Ventures
- ARAX Capital Partners
- aws Gründerfonds (Staatliche Förderbank – AWS)
- B&C Innovation Investments
- Dellbruck Ventures
- ecos private equity
- EXF Alpha (Venionaire Investment; European Super Angels Club)
- Fiedler Capital
- Kapa Ventures
- Michael Grabner Media
- OÖ Hightechfonds (LAND Oberösterreich)
- Pioneers Ventures
- PUSH Ventures
- Round2 Capital Partners
- Scheuch Family Foundation
- tecnet Equity (LAND Niederösterreich)
Corporate Venture Capital
- A1 – invests opportunistically (no own fund yet)
- UNIQA Ventures – invests opportunistically (no own fund yet)
- KELAG – invests opportunistically (no own fund yet)
- APA – invests opportunistically (no own fund yet)
- Kurier – invests opportunistically (no own fund yet)
- Seven Ventures – Media for Equity
- Constantia New Business
- Agro Innovation Lab
- Factory1 (KAPSCH Trafficom)
- ElevatorLAB (Raiffeisen Bank International)
- GreenStart (Klima und Energiefonds)
- Match Maker Ventures
Company Builder / Incubator
- Akostart (University / University of Applied Science OÖ)
- Blue Minds Factory
- CELIAN VENTURES
- Institute of Science and Technology Austria — Cube
- Sciencepark Graz
- Speedstart Studio
- UT11 (Up To Eleven)
- Werkstätte Wattens
- Zentrum für angewandte Technologie
Startup Zentren bzw. Innovation-Hubs
- Lake Side Park (Klagenfurt)
- Talent Garden (Eröffnung 2018, geplant)
- WeXelerate (Grand Opening, Nov. 2017)
Training and Coaching for Investors / Startups
In cooperation with Venionaire Capital, DerBrutkasten.com publishes a four-part article series on the subject of artificial intelligence. We are concentrating on the economic aspects of how AI works to the current research and the future of artificial intelligence.
The fourth and last article will concentrate on how the artificial intelligence will turn out in the future.
According to a quote from Stephen Hawking in The Guardian, Artificial Intelligence will be “either the best, or the worst thing, ever to happen to humanity”. The growing computer performance and Big Data enable machines to become even smarter. In an open letter, therefore, numerous industry leaders, such as Elon Musk or Hawking, call for the prevention of artificial intelligence and the control of the systems.
Musk believes that AI could become an existential threat to people and emphasized the need for legal requirements. Other AI skeptics are worried about the labor market. AI, according to the apprehension, will at least provide a new wave of mass unemployment in the short to medium term.
Joe Lobo, “chief botmaster” at the Startup Inbenta, has a more positive idea of the future of work and artificial intelligence. In a Forbes podcast he explained how technologies create new jobs and people can use their skills for new opportunities. So far, the development showed that AI systems complement human workers more than replace them. AI skeptics and enthusiasts, however, agree that jobs will change and new forms of employment will arise.
Whether advocates or adversaries, it is certain, in AI will be further invested and researched. In the end it is in our hands whether we end up with a terminator or a Wall-E.
However, to an artificial superintelligence it is in any case still a long way, as we described it in the second part of our series. In the third part, we also showed that the research and development of artificial intelligence was not a linear process, but had to repeatedly record ascensions and declines. The economic impacts of AI, which we dealt with in the first part, are equally interesting for start-ups and early-stage investors.
For the whole article click here.